Every year or so, the U.S. Postal Service changes the standard Terms and Conditions that apply to its newly awarded Highway Contract Route (HCR) and Contract Delivery Service (CDS) contacts. When this occurs, the new terms only apply to newly awarded contracts–existing contracts are unaffected and retain the same terms as when awarded.

But this year, the Postal Service has sought to apply new Terms and Conditions to existing CDS contracts as well as newly awarded ones. In an email to its CDS contractors, the Postal Service asked them to sign, without any “alterations or additions,” a contract modification that incorporated the new terms. If the contractor did not so, the Postal Service’s email threatened contract termination:

“Because of the Postal Service’s interest in maintaining consistency across its many CDS contracts, please note that a failure to respond to this correspondence … may lead the Postal Service to consider termination of the subject contract.”

After receiving this email, many contractors asked me: “Can the Postal Service really do this?” In my opinion, several legal arguments, if upheld, would make the resulting modification unenforceable. For example, the modification might fail for lack of consideration, because it gave the Postal Service what it wanted without giving anything that contractors valued in return. And it might fail for violation of the implied covenant of good faith and fair dealing, because it seeks to recapture benefits that were foreclosed at the time of contract award. But I think the best argument against its enforceability is based on the legal theory of coercion and duress. Normally, this is a difficult argument to make, but here the elements seem apparent from the Postal Service’s email itself.

Proving duress

To be relieved from a contract modification you signed on the basis of duress or coercion, you need to prove three things. First, you need to show that you involuntarily agreed to the modification. One common way of showing this is writing “under protest” next to your signature. But that was not an option here, because the Postal Service’s email said you must sign with “no alterations or additions” or it would nullify the document. No contractor sought the modification, nor was asked how they viewed it. The Postal Service’s email itself thus establishes involuntary action, as it permitted no response other than the contractor’s signature on an unaltered modification.

Second, you need to show that the circumstances permitted no other alternative than signing the modification. Once again, the Postal Service’s email again establishes this for you. The email says you must sign the modification or you risk having your contract terminated. In these circumstances, you have no other reasonable alternative to signing, because if you do not sign, you will lose the contract.

The Postal Service might argue that the email said a refusal to sign would only “lead the Postal Service to consider termination of the subject contract,” not that it was dead certain to be terminated. But viewed in context of the entire email, there was little reason to believe a non-conforming contract would survive. The Postal Service’s email explained that it was seeking uniformity in contract terms among all of its CDS contracts. If you did not sign the modification, then your contract would run counter to this policy. The email gave no reason to hope that your non-uniform contract would remain in place if you refused to sign the modification.

Third, you need to show that the circumstances you were faced with were the result of the Postal Service’s coercive acts and not a predicament of your own making. Once again, this is established by the Postal Service’s email. Contractors did nothing to place themselves into this predicament.

Gurdak case found similar coercion

A dozen years ago, the Postal Service tried something similar and the resulting modification was found to be coerced and unenforceable. In George P. Gurdak, PSBCA No. 5049, 05-2 BCA ¶ 33,092, the parties had previously agreed to a 10-year facility lease that required the contractor to make some renovations. When it came time for the Postal Service to approve the design of the renovations, the Postal Service balked, but not because of any problems it had with the design. Instead, the Postal Service wanted to pay a lower rent because it had re-measured the usable space and it was smaller than USPS had thought. The contractor strenuously objected to the modification, but the Postal Service said, “Take it or leave it.”  Without USPS’s design approval, the contractor could not proceed with the project, so the contractor signed the modification that reduced the lease rate.

After the building was renovated, the contractor submitted a claim for the original, higher lease rate. The contracting officer denied the claim, contending that the contractor had agreed to the lower rate in the signed modification. The contractor appealed to the Postal Service Board of Contract Appeals, contending the modification was coerced and unenforceable. The PSBCA agreed. Even though the Postal Service had the contractual right to approve the renovations design, its use of that right must still be exercised in good faith. The Board held that the Postal Service could not threaten exercise of a legitimate contract right if the exercise of that contract right would violate notions of fair dealing due to its coercive effect.

Just as in Gurdak, the Postal Service has threatened CDS contractors with exercise of a legitimate contract right (here, termination) in a way that violates notions of fair dealing and is coercive. In both cases, a “take it or leave it” threat was made for the wrongful purpose of forcing the contractor to accept new contract terms.

The Board in Gurdak held that the coerced modification was not binding on the contractor. Did this mean that the contractor could hold the Postal Service to those parts of the modification that it wished to enforce? In its email to CDS contractors, the Postal Service stated that the modification would also remove “outdated supplier obligations.”  If that is indeed true, then under Gurdak, is it possible that the Postal Service would still be bound to those parts of the modification?

What’s next?

In most cases, the modification will likely have little impact on performance, but it does increase the risk of disputes arising from the modification’s new obligations and approval requirements. Should USPS seek to enforce one of these new obligations, you may need to assert that such directive constitutes a constructive change because it arises from a coercive and unenforceable modification. If a mutually agreeable solution cannot be reached, you may need to bring a claim for the cost impact of the new directive under the Claims and Disputes clause of the contract.

Arbitration is often seen as a way of getting a more predictable result in complex construction disputes. The subject matter expertise available with experienced arbitrators and the finality of the arbitration process itself are certainly important considerations. But resolving disputes in arbitration can sometimes lead to surprising results, even ones that might be inconsistent with the underlying contract or with applicable state law.

The Eighth Circuit’s recent decision in Beumer Corp. v. ProEnergy Services, LLC, No. 17-2862 (8th Cir. Aug. 9, 2018), is an example of such a case. The arbitrator in this case awarded attorney’s fee of nearly a million dollars more than the liability cap in the contract. Despite the possibility that this result was inconsistent with state law, the Eighth Circuit let the award stand.

Continue Reading Why getting the wrong result in arbitration may be what you bought

The False Claims Act case against Lance Armstrong lasted longer than his 7 year Tour de France win streak.

While the settlement of the False Claims Act case against Lance Armstrong has generated a press release, a quick online search didn’t produce a copy of the actual agreement. So I filed a Freedom of Information Act request and the next day the Department of Justice provided me a copy of the Lance Armstrong settlement agreement.  Thank you, Team DOJ!  Below is my take on that agreement and what it tells us about the case.

The settlement amount

The settlement agreement provides that Lance Armstrong will pay $5 million to the Government and $1.65 million to the relator Floyd Landis. To put this in context, the Postal Service had paid about $40 million to sponsor Team Postal. Trebling that amount, and throwing in civil penalties and investigative costs, bumps up potential damages to well over $100 million. The settlement amount was thus less than 7 cents on the dollar.

Damages was always the Government’s weakness – because there weren’t any. This should have been apparent at the outset from the contemporaneous USPS reports on how much publicity and new revenue the Team Postal sponsorship had generated. These reports were poppycock, of course, but they still posed insurmountable problems for the Government’s case.

Continue Reading What the Lance Armstrong Settlement Agreement Tells Us about the Government’s Case

The standard form construction contract documents published by the American Institute of Architects are used widely throughout the construction industry. With assistance from federal agencies, the AIA created specific construction contract documents, such as the B-108-2009, to address the unique nature of federally-funded and insured projects. This year the AIA issued its once-a-decade revisions to address changes and trends in the industry. While the 2017 revisions d0 not materially alter the documents specifically tailored to federal projects, some of the changes will affect documents regularly used by federal contractors. They included changes in the insurance and indemnification clauses, addition of new limits on contractor claims, and new language addressing the treatment of retainage and the assessment of liquidated damages.

Husch Blackwell’s Brent Meyer prepared this overview of the noteworthy changes in the 2017 edition of the AIA contracts for Law 360.

 

Further reading—

7 Major Revisions To Standard Form Construction Contracts (Dec. 4, 2017)

Good faith and fair dealing puts an end to the “gotcha” in submittal review (June 26, 2017)

The Davis-Bacon Act does not apply to P3 projects (April 7, 2016)

In Joe Tex’s song about unrequited love, the Southern Soul singer belts out, “I gotcha, never shoulda promised to me.” Joe Tex may have thought this approach is the right one for romantic disappointment, but parties to a contract have a different set of obligations.

A lawsuit by Washington State contractor Nova Contracting should serve as an alert to owners dealing with the assessment of a contractor’s performance. Nova’s lawsuit came about because of the owner’s termination of the contract. Nova claimed the owner was using a “gotcha” review process for its submittals that was designed to prevent performance. The trial court agreed with the owner.

Culvert_with_a_dropNova appealed and the court of appeals found sufficient questions of fact to send the dispute back to the trial court. The opinion offers insight into fair dealing and good faith in the performance of construction contracts. Nova Contracting, Inc. v. City of Olympia, No. 48644-0-II (Wash Ct. App. Apr. 18, 2017). Continue Reading Good faith and fair dealing puts an end to the “gotcha” in submittal review

The U.S. Postal Service spends about $3 billion per year to move the mail by truck and does so under a special type of contract called a Highway Contract Route (HCR) contract. These contracts have unique contract clauses, and even their own lingo. For example, an HCR “amendment” is what the rest of the government contracting world would call a contract “modification.”

One of the biggest differences between HCR contracts and other government contracts is the Changes clause. Under an HCR contract, the contracting officer has limited ability to direct unilateral changes. The CO may only issue a unilateral change, called a “minor service change,” if the price impact would be $5,000 or less. Under a Contract Delivery Service (CDS) contract – a subset of HCR contracts for mailbox deliveries – unilateral changes must be $2,500 or less. Even for these changes, a contractor who disagrees with the CO’s determination may file a claim for additional compensation.

In addition to these monetary thresholds, unilateral changes are further restricted to certain types of changes. The only unilateral changes a CO can direct are an extension, a curtailment, a change in line of travel, a revision of route, and an increase or decrease in frequency of service or number of trips. The CO has no authority to unilaterally direct any other change, even if the price impact would be $5,000 or less. For example, the contracting officer may not unilaterally direct a contractor to change equipment or buy new equipment. Continue Reading The unique Changes clause in Postal Service HCR contracts

Every government contract contains implied duties, such as the duty to cooperate and the duty of good faith and fair dealing. Such implied duties generally prohibit one party from interfering with the other’s performance or taking actions that undermine the other’s expected benefit of the bargain.

Implied duties offer important protections when an issue is not clearly addressed in the text of the agreement. But courts have been reluctant to apply them in a way that overrides express contract language. A party generally does not breach the duty of good faith and fair dealing, for example, simply by exercising a right that is expressly provided in the contract.

But the government does not have carte blanche. Even if there is express language that gives the government a certain right, the government cannot exercise that right unreasonably or in a way that interferes with the contractor’s performance. In Agility Public Warehousing Company KSCP v. Mattis, No. 2016-1265 (Fed. Cir. Apr. 4, 2017), for example, the Federal Circuit explained that the government can breach the duty of good faith and fair dealing even if its conduct is otherwise consistent with the express terms of a contract.

Airmen serve dinner in the field in a mobile kitchen trailer during Global Medic 13 on Fort McCoy, Wis., July 16, 2013. The food service specialists are assigned to the 940th Force Support Squadron, Beale Air Force Base, Calif.
Source: DOD Image Library

Continue Reading Can the government contract around the duty of good faith and fair dealing?

Similar to a Termination for Convenience clause, a Termination with Notice clause (often found in U.S. Postal Service contracts) allows a party to end a contract without breaching it. Under the clause, either party may terminate the contract without cost consequences by providing advance written notice – usually 60 days – to the other party. The Postal Service Board of Contract Appeals (PSBCA) addressed the limits that apply to the exercise of this clause in a decision on two closely related cases. Cook Mail Carriers, Inc., PSBCA No. 6583, and Patricia Joy Sasnett, PSBCA No. 6584, issued on March 24, 2017.

Cook and Sasnett each had separate Highway Contract Route contracts to transport mail at designated times between various points in Alabama. In March 2014, the Postal Service made changes to its processing network that affected several contractors, including Cook and Sasnett. While the network changes could have been effected by modifying their contracts, the Contracting Officer (CO) instead exercised the Termination with Notice clause.

When he terminated the contracts, the CO misunderstood the network changes.  He thought the changes were needed because the Gadsden, AL mail processing facility was closing.  In fact, the Gadsden facility was already closed and revised routes were needed because other mail transportation hubs were being relocated.

Propriety of the termination

Cook and Sasnett filed claims asserting the terminations were improper and the case ended up at the Postal Service Board of Contract Appeals (PSBCA). Examining the Termination with Notice clause, the PSBCA noted that while it does not include any express limitations, its use “is not truly unlimited.”  The PSBCA then considered whether the CO’s action was proper under three separate legal principles. Continue Reading Three legal principles that limit the Termination with Notice clause

The Missouri Court of Appeals decision in Penzel Constr. Co. v. Jackson R-2 School District, No. ED103878 (Mo. Ct. App. Feb. 14, 2017), is an important development for public construction contracting in Missouri. The decision adopts the Spearin Doctrine and approves the use of the Modified Total Cost method for proving damages. While these concepts have been used widely in federal construction contracting, the Penzel decision is the first published decision recognizing them in Missouri.

The Penzel case involved additions to a public high school. The School District hired an architect. The architect retained an electrical engineering sub-consultant. When the project went to bid, the School District furnished bidders with the architect’s plans and specifications. Penzel Construction Company submitted a bid as the general contractor.

Penzel’s electrical subcontractor was Total Electric. Total’s bid was $1,040,444. Neither Penzel nor Total “noticed” any errors, omissions, or other problems with the plans and specifications during the bidding process.

Total encountered delays totaling 16 months, which Total attributed to “defects and inadequacies” in the electrical design. Under a liquidating agreement between Penzel and Total, Penzel sued the District. Penzel alleged that the District impliedly warranted the design. Penzel claimed the design was not adequate for completing the project.

In addition to proving liability, Penzel needed to prove the damages associated with its loss of productivity claim. To do so, Penzel sought to use the Modified Total Cost Method. The claimed damages were comprised of additional project management and supervision costs, wage escalation, unpaid change order work, and consultant’s fees. Continue Reading The Spearin Doctrine and Modified Total Cost claims on Missouri public projects

Contract Disputes Act claims are subject to a six-year statute of limitations. While the math involved in calculating when that limitations glass-time-watch-businessperiod runs seems easy, determining when a CDA claim accrued is not always so simple. FAR 33.201 defines “accrual of a claim” as the date when the party with the claim knew or should have known all of the events that “fix the alleged liability” of the other party. But the Federal Circuit’s decision in Kellogg Brown & Root Services, Inc. v. Murphy, No. 2015-1148 (Fed. Cir. May 18, 2016) [PDF], shows that the date of accrual is not always clear.

Continue Reading Accrual of contractor claims after KBR v. Murphy